Sunday, September 20, 2009

What about cutting the financial sector as well as the public sector

If I were a conspiracy theorist, I’d be saying that it had all been planned. The banks knew the crisis was coming last year and that they couldn’t trade dodgy mortgage securities and lend forty times their core capital without coming a cropper. So, they held a gun to the government’s head: take our toxic assets or we blow the economy up. The government obliged with a £1.3 trillion pound bail out.

But things weren’t going well at the turn of the year, with public anger at Sir Fred Goodwin’s pension creating pressure for real reform. So they took MPs out one by one and shot them - or rather exposed their expenses fiddles to the Daily Telegraph, which amounted to the same thing. That drew a line under the campaign for banking reform, as public anger against Sir Fred and City plutocrats turned to public anger against flipping MPs and their duck houses.

But there was still the problem of how to hide the massive cost of getting the government to take on the bad debts of the banks. So they dusted down a few myths from the 1970s that every middle aged newspaper reader would understand: profligate public spending. The bloated state.

I’m not allowed to be a conspiracy theorist. But when you think of it, this is not far from what actually happened in the year since Lehmans exploded. A crisis caused by the financial sector has turned int a crisis fo the public sector. Suddenly, all we talk about is cuts.

The infuriating thing is that the Tories are right, but for the wrong reasons. Yes, there will have to be cuts. The economic recovery has been bought at a fabulous cost, and this will have to be repaid. Right now, we are paying it by printing money to buy government debt, which is unsustainable. However, the fiscal crisis is not the fault of over generous spending on public services. The record peacetime budget deficit is almost entirely the cost the banking bail out plus the cost of the recession that followed it.

But pretty soon all we’ll hear about is NHS waste, feckless layabouts on benefits and too many bureaucrats living off the public purse. Actually, there are too many bureaucrats living off the public and many of them are earning salaries which should never have been permitted in the public sector. But to be clear: they didn’t cause this crisis. It was excessive lending and spending by Britain’s financial sector which caused the financial implosion.

That is why Britain has the biggest budget deficit in the G20 and why we are still in recession when other European countries are out of it. There is evidence that countries with higher state spending, like Germany and France, were better able to cope with the economic shock because they weren’t so dependent on a financial services sector. But the whole country seems spontaneously to be talking the language of public sector infamy.

Even Vince Cable, the astute and fair-minded finance spokesman of the Liberal Democrats, has been talking almost exclusively recently about cuts. He believes that spending needs to reduce by £80-£100 billion and will require a freeze on public sector pay, axing public sector pension rights and ditching things like Trident and identity cards. Yes, some cuts are good. It was always senseless to spend tens of billion on a weapons system designed to destroy Russian cities when we no longer have a beef with them. And the identity cards scheme, like the NHS computer system, is a disaster waiting to happen.

Cable has a point too about public sector pensions and pay. Is it fair to ask workers in the private sector, who are losing their own final salary pensions, to pay higher taxes for unfunded public sector pensions? But this only shows how iniquitous and divisive the focus on cuts becomes. How convenient for workers to be fighting with workers about who should pay for costs of the financial disaster while the people who caused it all, the financial plutocrats, are running off with ever greater bonuses and multi-million remuneration deals.

Now, I am sometimes taken to task for promoting he politics of envy when I talk like this. Am I some old fashioned Marxist who thinks everyone should be earning the same? Don’t I realise that the wealthy contribute disproportionately to tax revenue, and if we frighten them all away, we will have to cut public services even more. Well, I’ve long since ceased trying to give myself a political label, but I have no qualms about calling for higher taxation for the very rich, and not just because multi-million salaries for bankers are an obscenity when subsidised by our taxes This is a grossly unequal society, and the benefits of economic growth have gone disproportionately towards the very wealthy over the last two decades. All economists accept that salaries have stagnated while profits have increased their share of national income.

One of the reasons for the vast increase in UK private borrowing - £1.5 trillion - was families trying to maintain living standards. As Keynes pointed out, this can only lead to disaster. The wealthy don’t spend their money, they buy assets with it - like houses, which inflate in value causing bubbles. Meanwhile demand in the economy dwindles forcing firms to cut prices or go out of business. The debt bubble that has exploded was in large measure a result of too few people getting their hands on too much national income.

So, we should end the tax breaks and tax evasions which have allowed private equity barons to pay less tax than their cleaners. Which allow people - MPs included - to pocket huge untaxed gains on property sales. Which have lead to the loss of £25bn in tax revenue to British dependency tax havens like the Cayman Islands, the cash-strapped governments of which - incredibly - we may now also have to bail out with tax payers money. As the chairman of the Financial Services Authority, Adair Turner, argued, we should be looking for ways of properly taxing financial services which have been getting too large a share of national wealth. That was what Roosevelt did in America, and no one called him a Marxist. Yes, public spending must be cut; but when it comes to cuts, you should always start at the top.

"(...) we should be looking for ways of properly taxing financial services which have been getting too large a share of national wealth."

While this article contains a very perceptive analysis, it is, unfortunately, the case that ways of taxing and indeed regulating financial services that will not disadvantage the UK financial-services sector in relation to financial-services sectors elsewhere in the globalized economy require to be globally concerted ones. This is, of course, very difficult to manage, however, particularly in view of the power and influence that US business wields over US governments.

The genesis of the financial crisis which gave rise to the current economic one has much to do with globalization, together with the associated technology, both of which are transforming the world in such a way that the UK government simply does need to act in concert with the rest of the European Union so far as taxation and regulation of the financial sector are concerned, and the EU in turn needs to act in this sphere within a globally constituted framework.

Indeed, the current crises appear to have brought us to a point at which global economic anarchy has made Anglo-American capitalism as we have known it unsustainable. Consequently, the world, sooner rather than later, will have to set about devising what the economist and anthropologist Dr Paul Jorion calls a global economic constitution, although it might be better not to call it that. There is more on this at

http://frankly.yolasite.com/

and

http://www.pauljorion.com/blog/?p=165

I am afraid that, as Dr Doom (Nouriel Roubini of RGE Monitor) has been pointing out, the Anglo-American financial system is fundamentally and seriously damaged. The scale of that damage is so great and indeed difficult to quantify that it hardly bears thinking about. Tinkering with any aspect of it won't fix it, and, while it remains to be fixed, the remaining inequalities in society cannot be very successfully addressed and are indeed rather likely to get worse.

About Me

Iain Macwhirter is the award-winning political columnist for the Herald and Sunday Herald. He has been a political broadcaster for over 20 years, in Westminster and Holyrood, and is former Rector of Edinburgh University.